As Dwight Eisenhower famously said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” I can think of no more fitting description for how the solar and energy storage industry is transitioning from the exceptionally turbulent 2022 to the uncertain 2023.
New normals have yet to be established as energy transformation pacesetters must grapple with constantly shifting, often conflicting, geopolitical and macroeconomic forces resulting in strategic dilemmas.
The purpose of this discussion is to ensure industry participants take strategic measures to maximize opportunities and mitigate risks associated with the following key market trends:
The regional and industry expansion of forced labor laws like UFLPA;
The re-globalization of solar PV and energy storage system supply chains;
Government interventions in polysilicon and critical mineral markets;
First-mover advantages in electric vehicles;
And the validation (or not) of long duration storage and green hydrogen projects through piloting.
Expansion of Forced Labor Laws
Strategic questions include: Where do my batteries and materials inside them come from? Will EU supply chains comply with proposed laws? How to diversify suppliers for optimal geopolitical risk mitigation? Should traceability research start now?
In the aftermath of the WRO on Hoshine Silicon Industry, additional 2022 solar supply chain challenges stemmed from UFLPA induced US PV module import bottlenecks. US Customs and Border Protection (CBP) detained significant PV module volumes, causing a 23% year-over-year expected slump in US installs. But there are signs of progress as equipment trickles out to anxious developers.
Despite early warnings, unclear guidance from government agencies left stakeholders unprepared for CBP’s stringent vetting processes. Buyers and sellers should not allow the same mistakes with energy storage. The Drive article by Sheffield Hallam University authors already outlined potential impacts, painting a stark picture of what UFLPA may bring to the US auto industry.
With rising electric vehicle adoption and close ESS and EV supply chain linkages, ESS sourcing risks getting caught in the crosshairs. Senate Finance Chair Ron Wyden has begun investigating ties between US automakers and Chinese forced labor in Xinjiang. Incoming congressional leadership may swiftly expand these probes into ESS markets.
Beyond the US, the regional expansion of similar structural forced labor import bans is nearly assured. An EU Commission proposal envisions UFLPA-like bans on forced labor imports across the EU, while also expanding bans globally to increase leverage. For regulators, critical mineral supplies from high-risk nations like the DRC’s abundant cobalt, are low hanging fruit.
Re-globalization of Solar PV and ESS Supply Chains
Strategic questions include: Where should I invest? How do I position competitively? How to structure RFPs? Am I prepared for growing risks from primary OEM suppliers? What’s my plan if tariffs are removed?
The impacts of the aforementioned labor laws and a series of tariffs, like Section 201/301 and antidumping/countervailing duties on China, have greatly increased imported PV module costs. Apart from a new 24-month tariff period until June 2024, the Biden Administration has not indicated any relief for these tariffs.
The Inflation Reduction Act’s (IRA) generous support for domestically manufactured solar and energy storage provides further incentives for supply chain diversification and localization of manufacturing within the cleantech industry.
India too is pushing for greater solar supply chain self-reliance. India’s annual solar deployment is expected to surpass 20 GW in the 2023 fiscal year, advancing toward its 2030 goal of 500 GW of renewable energy generation capacity. To reach this target, India’s central government has indicated a desire to control more of the supply chain domestically. India has undertaken an array of protectionist policies akin to the US.
In April, India’s central government approved a production linked incentive scheme for integrated solar manufacturing worth over $611 million to boost 10 GW of capacity. Import duties start at 14.5% and can exceed 50%.
In fact, the EU appears to be an exception with no formal localized solar PV or ESS affirmative strategies yet defined. Remarks by European Commission President Ursula von der Leyen at the 2023 Davos Forum, hinted at structural challenges for the EU to establish commercially viable internal supply chains. Critical policy actions to overcome these challenges are imminent for the EU.
Despite boasting some of the world’s most ambitious decarbonization plans, high labor and energy costs hamper internal localization efforts across the EU. Europe may ultimately make a determination to be the export market of preference for American, Indian, and SE Asian module suppliers, focusing its efforts instead on downstream job creation and deployment of equipment.
Polysilicon Price Collapse, Government Interventions, Lithium Relief Ahead
Strategic questions include: How will global supply/market conditions impact new US polysilicon investments? Where are new lithium resources being developed? What are the policy risks there? How to structure my RFPs? Can I hedge my indexed battery procurement agreements?
Global trade disputes have cast a dark shadow over the global polysilicon supply and demand balance. After 18 months of tight supply and surging prices, dramatic polysilicon market repositioning kicked off the first weeks of 2023 as prices plummeted 55% from December 2022 to $18/kg.
As reflected in the CEA’s PV price forecast report, the price collapse has been driven by a massive wave of new Chinese capacity additions. Chinese polysilicon supply is forecast to nearly double in 2023.
However, following a China polysilicon manufacturer’s conference this month, the drastic downward pricing trend suddenly reversed as polysilicon prices spiked over 30%. Quarter one is a typical period of pricing volatility as buyers and sellers jostle to test market floors. This phenomenon will undoubtedly invite scrutiny and potentially spur more government measures to curb price gouging. Thus far government actions have been rare but notifications have been issued to polysilicon manufacturers to control 2023 pricing lest PV module prices be affected.
While lithium pricing has remained comparatively stable over 2022 and 2023, this has not alleviated global battery storage industry pressures with elevated prices persisting. However, relief measures may be imminent given rapid capacity growth over 2023/2024. Latin America’s emerging lithium suppliers have witnessed varying degrees of government involvement.
Representatives from Argentina, Bolivia and Chile have openly discussed cartel formation. The OPEC-like trading bloc aims to keep pricing high enough to justify massive investments required to support new lithium mining operations, while also bolstering state revenues via these new operations.
In theory, a Latin America-wide lithium focused trading bloc could become a potential counterweight to Chinese downstream market dominance. However, across Latin America thus far, there are scarcely any success stories for government-controlled natural resource corporations. Additionally, Australia’s clear global leadership in lithium mining will undermine any global pricing power a regional cartel hopes to wield. Hence, while unlikely, Latin American lithium mining government sponsored cartelization may only serve to spur investments into supply from other free market jurisdictions like the US and Canada.
First Mover Advantages in Electric Vehicles
Strategic question: Are residential or commercial opportunities more likely to profit? Which part of the EV value chain is attracting the most investment?
According to research from LMC Automotive and EVVolumes.com, electric vehicle sales hit an all time high in 2022 capturing 10% of total global auto sales. While subsidy driven markets in Europe and China accounted for a hefty proportion, the milestone is momentous. Attractive new IRA tax policies combined with a swell of new EV models from legacy automakers should entice prospective buyers. The US looks primed to catch up swiftly in the short term. However, with consumers continuing to grapple with inflation and worries of an economic downturn looming, 2023 is shaping up to be a challenging year.
While uncertainty for EV sales abounds, this could potentially open doors for proactive enterprises determined to gain first-mover advantages in the EV sphere. For generous charging infrastructure incentives, a focus on electrification or opportunely leveraging these incentives may be prudent. In terms of volume, the EV charging market is projected to tilt predominantly toward residential chargers. This market may mirror the fragmented, high customer acquisition cost structure of residential solar. Similarly, public charging deployment will occur at municipal levels. While more lucrative from a pricing standpoint, comparable fragmentation issues and delays may ensue.
If clean energy history repeats itself, initial dominance in the commercial EV market may occur from early adopters seeking green credential brand differentiation focused on their core business operations. This was the case when electricity guzzling data center corporations signed some of America’s first solar virtual power agreements over the past decade. Their actions opened doors for others. It bears noting however that 60% of total green power usage within the EPA’s top 100 partners has been driven by just 15 companies.
Piloting Long Duration Storage and Green Hydrogen
Strategic question: What is our corporate strategy around deep decarbonization? What investment opportunities exist per technology type? How to quantify and manage technology risks in the short term? Where will the renewables come from to support pilot projects?
Long duration energy storage (LDES) and green hydrogen (GH2) investors endured an exceptionally difficult 2022. SPAC fueled LDES suppliers saw share prices crater alongside long-standing fuel cell and electrolyzer equipment suppliers. But optimism persists across the industry. To jumpstart pre-commercialization operations for novel technologies, a glut of incentives at the state and federal level in the US are proving effective. The hype cycle nears its end and 2023 is shaping up to be a critical year for early innovators to demonstrate their technology’s bankability.
An increasing array of LDES and GH2 pilot projects have gained particular attention sponsored by the Department of Energy’s (DOE) $8 billion Hydrogen Hub program. Over 20 projects are presently vying for portions of this funding. Similarly, the DOE is providing $355 million funding for development of 11 LDES demonstration projects focused on early benchmarking across technology types. Successfully capturing these funds is key for potential investors staking an early competitive foothold.
With a host of regulatory and commercialization obstacles, demonstration successes for LDES and GH2 technologies takes on growing importance. One can look to the failed $1 billion Petra Nova coal power project and subsequent shadow cast over America’s carbon capture, utilization and storage future. This project benefitted from $195 million funding from the DOE.
The project has remained offline since May 2020. Additionally, it never fulfilled regulatory requirements related to CO2 capture rates while operational. LDES and GH2 pilot projects must avoid this fate to maintain investor interest and trust from an enthusiastic development community.
